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Wish you understood financial statements? Let’s review the income statement (sometimes called the statement of operations).

It summarizes sales and profits over a period of time, such as three months or a year, and usually offers information for the year-ago period too, so you can compare and spot trends.

Consider Coca-Cola’s income statement for 2012. At the top, you’ll find net revenue (sometimes called sales). For Coca-Cola, it’s $48 billion. Working our way down the income statement, various costs will be subtracted from revenue, leaving different levels of profit.

The item you’ll find just under revenue is “cost of goods sold” (sometimes abbreviated as COGS or called cost of revenue), representing the cost of producing products or services sold.

For Coca-Cola, it’s $19 billion. Subtract the COGS from revenues, and you’ll get a gross profit of $29 billion.

To find the gross margin, which reflects the costs of production compared to revenue, simply divide the gross profit by revenue.

Dividing $29 billion by $48 billion yields a gross margin of 0.60, or 60 percent. (It’s often illuminating to compare the results with industry peers. For example, gross margin is 52 percent for PepsiCo, which deals in snacks as well as beverages.)

Next, the remaining costs involved in operating the business, such as utility bills and advertising expenses, are subtracted, leaving the operating profit. Coca-Cola’s operating profit is $11 billion.

Dividing this by revenue yields an operating margin of about 22 percent. Crunching older numbers reveals that Coca-Cola’s operating margin is down from the mid-20s a few years ago — not a great sign. (PepsiCo’s operating margin is 14 percent.)

Finally, after items such as taxes and interest payments are accounted for, we come to net income. Coca-Cola’s is $9 billion.

Dividing that by revenue yields a hefty net profit margin of 19 percent. This number reflects how many pennies from every dollar of sales a company keeps as profit.

The Motley Fool